Peter Pays Paul

This article is very important read for all citizens to realize the costs associated with our benefit programs. Somebody always pays the price, and usually it is us.

Children are selfish. Not because they are unkind (though many are) but because they believe in cost-free transfers. They do not understand that providing the toys and other amusements they demand imposes a cost on their parents. Children live in a fantastical world where Barbie dolls and trips to the zoo can be delivered without depriving their parents of something they might have enjoyed, such as a bottle of wine or a few extra hours off work.

A free lunch for you is a painful cost for someone else | Jamie Whyte – Times Online.

I think home prices are coming back to reality.

Despite an increasingly uncertain economy, thousands of homebuyers around San Francisco Bay kept snatching up foreclosed homes last month, dragging down the median home price by 41 percent from a year ago, a real estate tracking firm said Thursday.

The median home price in the nine-county region plunged to $375,000 in October, compared with $631,000 in the year-ago period, according to San Diego-based MDA DataQuick.

Last month’s median price was down 6.3 percent from September and nearly 44 percent from the peak median of $665,000 in the summer of 2007.

NorCal median home price plummets 41 percent – Yahoo Finance.

Yesterday I posted about the SF Chronicle article that argued in favor of gaming the system to get lower payments on your mortgage.

I realized as I was at home and with friends that from the title of the post, it may have seemed that I was advocating not paying your mortgage.

This was not my intention at all.

Viewing Money and Wealth as a Tool

I believe that there are many things in life more important than money.

My love for Jesus helps me to view money not as and end in itself. Money is a tool that allows me to eat, stay warm, and accomplish bigger goals in life.

Wealth is not an end in itself. Wealth (an abundance) makes eating, staying warm, and accomplishing bigger goals easier. It can often provide an easier solution to the problems that we may face.

A Good Reputation is More Valuable Than Gold

A good name is to be chosen rather than great riches,
and favor is better than silver or gold. – King Solomon

Thousands of years ago King Solomon wisely wrote that a good reputation is more valuable than great riches. Riches and wealth may come and go, but a person’s reputation can outlast their life.

A good reputation is an inheritance that even a poor man can pass along to future generations.

Keeping Our Word

Keeping promises is something more important than money.

A mortgage is a contract or promise between two people. The lender promises to lend money to the borrower in return for an interest payment. The borrower promises to repay and compensate the lender with interest for the use of the money.

Should a borrower purposely stop paying their mortgage or lower their income in an effort to get “better terms” or a “more affordable” monthly payment they are going back on their promise to repay their debt.

Doing it Right

Most of the time I am a stickler for doing things “the right way”. This has a tendency to frustrate those closest to me who may just want to get the task accomplished.

Accomplishing tasks with excellence breeds a sense of personal accomplishment over a job well done. No corners were cut, no task was left undone, this project is fully completed.

Getting a better mortgage payment may be financially better now. People might think you are crazy to not take advantage of the situation.

It can be done right, or it can be cut short.

If “shortcuts” are taken, we truly only short change ourselves.

Blinded By Nearsightedness

Too often it is easy to look at the near term benefits and forget the long term consequences when thinking about our money and finances. I too often fall into this trap. I look for the easy fix now, rather than the long term benefit.

The current government loan modification may cause us to be blinded to the long term consequences on our character and the character of future generations.

Subtly, we may be teaching those that respect us the lesson that doing whatever it takes to make more money and acquire more stuff is the highest and best goal and anything should be done to accomplish it.

Wealth in the Journey not the Destination

The pursuit of wealth and all that is shiny can be so very attractive for what it offers. However, the journey to achieving wealth is probably just as important as the wealth itself.

Wealth alone cannot produce character, while the journey to wealth can.

Of the billionaires I have known, money just brings out the basic traits in them. If they were jerks before they had money, they are simply jerks with a billion dollars. – Warren Buffett

In the journey we develop character, perseverance, and humility. So let’s enjoy the journey, keep our promises, and do it right.

One of the major reasons that capitalism is successful and socialism or communism fails is that it takes into account human selfishness (sinfulness).

Each individual, barring some major spiritual catharsis, is going to do what is in their own best interest. The economic theory of capitalism takes this into consideration. Socialism denies this and believes that those in the central government WILL not act selfishly or shortsightedly.

Richard Thaler and Cass Sunstein argue that one of the major causes of this catastrophe was a failure to consider human weakness.

We think their mistake was to neglect the role of human nature. To prevent future catastrophes, regulators should focus explicitly on how to provide safeguards against two all-too-human frailties explored by decades of work in behavioural economics: bounded rationality and limited self-control.

Read the article..

The NY Times has an interesting article on the California town of Mountain House that sprang up during the housing boom. The first homes were sold in 2003 and according to the article 90% are underwater on their mortgages.

Read the Article

The NY Times also has a map of the locations where homes are worth less than their mortgages.

Interactive Graphic – NYTimes.com.

Thomas Cooley and Lee Ohanian argue that the road out of the cycle we are in should be marked by less regulation and less restrictive policies based in the reality of history and not the fiction of theory.

Obamanomics | Print Article | Newsweek.com.

Brian S. Wesbury and Robert Stein detail some of the unintended consequences that government intervention has had in the current economic strain.

Take, for example, the extension of unemployment benefits enacted in June. Normally, jobless benefits are available for 26 weeks. The extension, which will last temporarily through early next year, added another 13 weeks. Following this, between June and October–in only four months–the unemployment rate has risen from 5.5% to 6.5%, a full percentage point.

What’s odd about the jump in the jobless rate is that it has been accompanied by an unusual increase in the number of people who say they are looking for work. Normally, when the unemployment rate leaps upward we see a decline in the share of the population either working or looking for work (what economists call the participation rate).

…

Another example of unintended consequences is the new ability of the Fed to pay interest on bank reserves, a policy it has long wanted to implement to give it more accurate control over monetary policy. Regardless of how much sense this policy may make over the long term, it may be undermining the growth of bank lending right now. Excess reserves by deposit-taking banks typically hover at about $2 billion. In October, these excess reserves were at $268 billion. So with one hand the government is injecting capital into banks to boost lending, but with the other it is enticing banks to hold extra cash as reserves.

The Law Of Unintended Economic Consequences – Forbes.com.

I was going to write a post detailing the entrepreneurial ideals that Obama employed while running his campaign and ultimately gave him the victory. However, anything I post now would pale in comparison to the article from the WSJ.com

Obama Ran a Capitalist Campaign – WSJ.com.

During my morning reading two articles in the Wall Street Journal stood out to me and indicated that credit is not flowing the way that it had in the recent past.

I believe that this is a sign that the economy is deleveraging itself. We are likely in for a period of economic deflation followed by a period of inflation due to the governments massive printing of money.

First, this article regarding asset backed bond woes. These asset backed bonds are car loans, credit card loans, student loans, etc. wrapped up into bundles and sold to investors as a rated bond.

In October, only one deal of $500 million was sold, compared with $50.7 billion done the year before. That is a huge decline and means that far fewer consumer loans are being made. We should see a drop in consumer discretionary spending in the coming months.

Second, this article highlighting the rise in requests for trade financing to boutique firms. These boutique firms are thriving with the slow down in lending from banks.

One of the difficulties is that “They have no guarantee that the buyer’s bank will accept the seller bank’s credit because of solvency issues…”

Currently, banks don’t trust one another and do not want to lend to one another.

Government Intervention’s Role

I believe that the government’s intervention has added to the problems.

The Fed began the term auction facility in December of 2007. This allowed banks to borrow from the Fed without other banks knowing who was borrowing. Borrowing from the Fed in the past had been seen as a last resort and a cause for concern to other banks. With transparency removed, banks become distrustful of one another and slowed interbank lending.

I mentioned here that banks are lining up to get TARP funds because they don’t want to have a negative public opinion, and not necessarily because they need or want the funds.

Until the government takes a “hands off” role to the current financial system, there will be fear, mistrust, and hesitancy that will prolong the economic downturn rather aid it.

The WSJ.com is reporting that the banking bailout is luring thousands of banks to apply for some of the $700 billion the government is handing out.

Why are the banks lining up for the funds?

Now institutions across the U.S. worry that if they don’t try for the money, the market will judge them as too unhealthy to qualify, or lacking the savvy to deploy cheap government capital on acquisitions and investments.

Is this what the government had in mind when they intervened in the banking system?

Rescue Cash Lures Thousands of Banks – WSJ.com.